DuPont de Nemours, Inc.

Good day and welcome to DuPont's third quarter 2022 earnings conference call. Please note today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. Thank you. Chris McRae. Vice President of Investor Relations, you may begin your conference.

Good morning, and thank you for joining us for DuPont's third quarter 2022 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer, and Lori Koch, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our 2021 Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties, which may cause such differences unless otherwise specified. All historical financial measures presented today exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and also posted to DuPont's investor relations website. I'll now turn the call over to Ed.

Good morning, and thank you for joining our third quarter financial review. We posted strong quarterly results above our previously communicated guidance in an extremely challenging environment due to uneven macro conditions, and persistent inflation globally. Our revenue growth of 4% versus the year-ago period included solid organic growth of 11%. Customer demand remained strong across most of our key end markets during the period, highlighted by double-digit volume increases in select areas, including Cal-Res, Best Bell, Laird, Semi, Water, and Auto Adhesives. To combat persistent inflationary headwinds in raw materials, logistics, and energy, we continue to implement necessary pricing actions which have fully offset such headwinds to date. Given continued energy cost inflation, we now expect full-year 2022 inflation of about $800 million year-over-year, which we anticipate will be fully offset by pricing actions. Our third quarter results also demonstrated year-over-year operating EBITDA growth and margin improvement, reflecting DuPont's unique business mix, innovative solutions, and highly diverse end markets, as well as strong operational execution during the period. We are pleased to have reported strong performance during each of the first three quarters of 2022, and we remain firmly committed to continued strong execution in the coming periods. Turning to slide four, I will comment on the details of our transformation progress. First, last week's announcement that we completed the sale of the majority of our M&M segment to Celanese marks the completion of our last contemplated large-scale divestiture, for which we received $11 billion in gross cash. The M&M business is an excellent set of assets that we know will prosper, and we are confident that Celanese is the right owner going forward. We are excited by the prospect of proving to the market that our multi-year transformation has brought DuPont to a truly different place. After the Dow merger, followed by the spins that created the new DuPont, we have further transformed our business with large-scale deals, including the N&B split-off and now the M&M transaction. We further sold eight smaller businesses over the last three years, with proceeds totaling over $2 billion. We are starting the next phase of our growth from a position of strength, leveraging highly profitable businesses with strong and leading market positions centered in growing markets, as well as a healthy balance sheet. These assets include some of the best intellectual property in the respective industry verticals, with globally recognized brands familiar to us all, as well as the thousands of longtime B2B industrial customers. For DuPont, we are confident that our remaining mix of businesses offers a different dynamic with significantly lower volatility and higher expected long-term growth given our revenue mix. This is driven by a focus on secular tailwinds, including the 5G build-out and other electronics drivers, the global clean water infrastructure development, continued demand for safety and personal protection solutions, secular growth across multiple industrial technology verticals that we serve, and from next generation automotive growth. We believe we have built a portfolio that can perform alongside the best diversified industrial companies. Our businesses are aligned with secular growth trends, we deliver top tier levels of profitability, and we should clearly benefit from dampened business volatility compared to our portfolio from just a few years ago. These advantages are clear and will help us to generate superior shareholder value over time. Regarding the Delrin divestiture process, we continue to advance our internal work required to divest that business. We are being diligent with our overall marketing process to ensure we maximize value in proper market conditions and expect to have completed a sale in 2023. Before I move on, I'd like to briefly address the intended Rogers acquisition. We terminated this deal on November 1, which was the outside date of the transaction agreement originally signed a year ago. This was an unfortunate outcome in that the potential strategic fit of Rogers with our business was strong, and we saw a lot of opportunity, but were unable to secure regulatory approval for the transaction. We wish the Rogers team well. For DuPont, the inability to close the acquisition has no material impact on our ongoing business outside of the obvious loss of opportunity. We remain confident in the quality of our portfolio and its growth potential and will look to be opportunistic with select and targeted M&A moving forward. Shifting to capital allocation on slide five. With the receipt of the proceeds from the M&M sale, we are now able to accelerate our capital return options and further strengthen our balance sheet while maintaining flexibility to continue to grow the business through discipline and targeted M&A. Today, we announced that our board has authorized a new $5 billion share repurchase program, which expires June 30, 2024. We intend to act immediately and enter an accelerated share repurchase agreement for $3.25 billion of common stock, which includes the remaining $250 million under the previous authorization. We anticipate completing this ASR within about nine months, with 80% of the shares retired upfront during the fourth quarter. We would currently expect to complete the full $5 billion of repurchases within the authorization period. In addition, we will retire $2.5 billion of our senior notes due 2023 in the fourth quarter. The prepayment reduces refinancing risk in a rising rate environment while generating pre-tax annualized savings of over $100 million. Further, we plan to reduce our commercial paper balance to zero by year end, of which we had $1.3 billion outstanding at the end of the third quarter. In combination, this significant share repurchase authorization and our deleveraging plan demonstrates our continued commitment to returning capital to shareholders while maintaining a strong balance sheet. Our approach remains balanced and in line with our overall capital allocation strategy. We expect to finish the year with a leverage ratio significantly below our longer-term target, maintaining balance sheet capacity to further allocate excess capital to a combination of bolt-on M&A and potential share repurchases over time. Our M&A focus remains on targets that fit within our growth pillars and are aligned with key secular growth trends. With that, let me turn it over to Lori to discuss third quarter details as well as our financial outlook.

Thanks, Ed, and good morning. As mentioned, we saw continued strong demand during the quarter in most of our end markets, with organic growth better than our expectations coming into the quarter. The global economy remains challenged in some respects, but our team's focus on discipline pricing and operational execution contributed to operating even a margin expansion on the year-over-year basis. Turning to our financial highlights for the quarter on slide six, net sales of $3.3 billion increased 4% as reported and increased 11% on the organic basis versus the prior year quarter. Global currencies remain highly dynamic, as we saw a 4% headwind resulting from U.S. dollar strength against key currencies, including the euro, yen, and yuan. The 3% portfolio headwind reflects the impact of non-core divestitures. Breaking down organic sales growth, we saw 8% pricing gains and 3% higher volume. Volume growth reflects continued strong demand, most notably in semiconductor, water, and general industrials. needed somewhat by lower volumes for protective garments within safety solutions and ongoing softness in smartphone and personal computing markets globally within interconnect solutions. On a segment basis, third quarter organic growth was 15% for W&P, 7% for E&I, and I'll highlight 25% organic growth for the retained businesses that we report in corporate, largely representing the adhesive portfolio from the former M&M segments. On a regional basis, we delivered organic sales growth in all four regions, led by volume increases in North America and Asia Pacific. From an earnings perspective, operating EBITDA of $856 million increased 5% versus the year-ago period, and adjusted EPS of $0.82 per share increased 4%. These increases were driven primarily by volume gains as pricing actions were offset by higher inflationary cost pressure. Adjusted EPS in the quarter included a higher than expected tax rate, which I'll detail shortly. Operating EBITDA margin of 25.8% increased 30 basis points year-over-year on stronger volumes and productivity. Operating EBITDA margin in the quarter adjusted to exclude price costs was over 27%. Finally, incremental margin was 33% on a math-reported basis. Cash flow from operations during the quarter of $419 million adjusted for capital expenditures of $172 million and a $115 million tax prepayment related to the M&M divestiture resulted in free cash flow of $362 million. We continue to experience significant headwinds from transaction costs related to the M&M separation as well as working capital headwinds primarily from the divested M&M business. Free cash flow conversion in the quarter for the total company was 73%. For the ongoing portfolio, if M&M was excluded, free cash conversion in the quarter would have been in line with our target of greater than 90%. Turning to slide seven, adjusted EPS of 82 cents increased 4% compared to 79 cents in the year-ago period. Stronger segment results versus the prior year contributed 8% to adjusted EPS growth or $0.06 driven primarily by volume growth. Benefits from ongoing share repurchases continue to drive earnings growth, providing a $0.04 benefit to adjusted EPS. The absence of earnings related to non-core business divestitures and the impact of currency headwinds negatively impacted third quarter results, and we expect both to be more significant headwinds to year-over-year earnings in the fourth quarter. Our tax rate for the quarter was 26.2%, up notably from 23.5% in the prior year, resulting in a year-over-year headwind to adjusted EPS of $0.03 and a $0.05 headwind in the quarter compared to the midpoint of our previous modeling guidance. Our full-year base tax rate is now expected to be about 24%, with the increase driven by currency and mixed and geographic earnings. Turning to segment results, beginning with E&I on slide 8. E&I delivered third-quarter net sales growth a 3% and organic growth of 7%, including a 4% increase in volume and a 3% increase in price, partially offset by a 4% currency headwind. Sales growth was led by semi-conductor technologies, which increased mid-teens organically as strong demand continued, led by the ongoing transition to more advanced mode technologies and high semi-conductor FAB utilization, along with growth in 5G communications and data centers. Industrial Solutions posted another strong quarter with organic sales growth of high single digits, led by ongoing strength from CalRIS semiconductor-related product offerings, best-sell products serving recovering aerospace markets, OLED materials for new electronic displays-related model launches, and for healthcare applications such as biopharma tubing. InterConnect Solutions sales decreased mid-single digits on an organic basis due to volume declines. Coming into the quarter, we expected a return to positive organic growth within interconnect, but continued softness in consumer electronics, specifically smartphones, and lower PC and tablet demand globally. More than offset strong demand for Kapton film product applications in industrial end markets, such as rail and defense, and strength in layered product offerings, including electromagnetic shielding and thermal management. Given this demand softening, we now expect InterConnect Solutions' organic sales for the full year to be down mid-single digits. Operating EBITDA for E&I of $473 million was relatively flat as volume gains in semi- and industrial solutions were offset by lower volumes and weaker product mix in InterConnect Solutions, along with lower JV earnings. Operating EBITDA margin of 31.3% was down 110 basis points from the prior year due primarily to the impact of price cost. Turning to slide nine, W&P delivered net sales growth of 10% as organic sales growth of 15% was partially offset by a 5% currency headwind. Organic growth for W&P reflected a 13% increase in price and a 2% increase in volume. Organic sales growth was led by shelter solutions, which increased high teams, driven by pricing actions, and further aided by volume growth on continued demand in North America commercial construction. Sales for water solutions were up an impressive mid-teens organic growth rate on strong global demand for reverse osmosis and ion exchange resin technologies, as well as pricing gains. Sales for safety solutions were up low double digits on an organic basis as pricing actions were slightly offset by lower Tyvek volumes, given a shift from garments to other Tyvek applications and the resulting impact of manufacturing line change at first on production efficiency. Excluding the year-over-year Tyvek garment headwinds, total WMP volume would have been up approximately 5%. I will also acknowledge dedicated work of our teams for safely and promptly restoring operations at our Spruance plant earlier in the third quarter from an unforeseen utility disruption with minimal impact on the quarter's results. Operating EBITDA for W&P of $382 million increased 8% versus last year as pricing actions and volume gains more than offset higher product costs driven by inflationary pressure, weaker product mix, and currency headwinds. Operating EBITDA margin of 24.9% included 170 basis point headwind related to price cost. Excluding this price cost impact, operating EBITDA margin would have been 26.6% during the quarter. I'll close with a few comments on our financial outlook and guidance for the full year 2022 on slide 10. We expect solid demand trends to continue in the fourth quarter in many of our key end markets, such as water, industrial, and auto adhesives, to name a few. That said, we anticipate continued softness within interconnect solutions related to smartphones and personal computing globally and expect some slowing in customer fab production rates in our semi-business. Additionally, we expect some impact from reducing our production to drive down inventories on a consolidated basis. Lastly, we expect further currency headwinds to negatively impact both top and bottom line results. Based on these assumptions, we are adjusting the midpoint of our full year 2022 net sales guidance to the low end of our previous range and now expect net sales to be about $13 billion. Compared to our previous midpoint, this change reflects about $150 million of incremental foreign currency headwinds, with the majority of those headwinds impacting the fourth quarter. For the full year, we now expect foreign currency to be approximately a 4% headwind to reported net sales. Our organic next sales growth expectation of high single digits for the full year remains unchanged. Due to the same factors just noted, we are adjusting the midpoint of our operating EBITDA guidance to the low end of our previous range and now expect full year 2022 operating EBITDA to be about $3.25 billion. We now expect full year adjusted EPS to be about $3.30 per share within our previous range. The higher than anticipated base tax rate for the full year that I discussed earlier, which equates to a nine cent headwind versus our previous guide, is expected to be offset by a lower share count and net interest benefits resulting from a higher cash balance and the capital deployment actions we are taking in the fourth quarter. In closing, our team remains focused on operational execution and expect to use the levers within our control to meet our financial goals and continue to drive value for our shareholders. With that, we are pleased to take your questions, and then we turn it back to the operator to open the Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please limit questions to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning, Ed. Congrats on getting all that done. Hey, just would love to put a finer point on how you're thinking about capital deployment beyond what you announced today. And, you know, and specifically as it, you know, relates to kind of M&A, should we really think this will be bolt-ons and kind of neatly fitting with inside of, you know, how the portfolio is positioned. It certainly seems like you could benefit from just letting things settle down for a while and allowing people to digest kind of what you do and how the portfolio is taking shape.

Yeah, Jeff, I think very good points you're making. We're in no rush to do an M&A deal, but I'd say especially in this environment, I don't think any of us know where things are actually headed yet. We're going to take a pause here, see how the next set of months play out. We do have targets we've been interested in for quite a period of time. Whether they're actionable or not is another kind of story. They clearly would be in the pillars of the secular growth areas, the five areas that we've talked about. We're not going to deviate off into anything else, but We're in the same mode, I think, as your opening comment, Jeff. You know, let things settle down. We've made a lot of moves. We've pretty much finished our transformation except still for the sale of Delrin, which will happen in 2023. And so no rush to do anything. But we do have the capacity to do some bolt-on type M&A. And that's the way we're thinking about it is more on the bolt-on size of a deal.

Great. Thanks for that context. And then... Maybe just a follow-up for Lori. Can you just kind of level set us on what you're expecting for the actual net proceeds for M&M? You paid some tax here in Q3. And also you did note some free cash flow headwind from M&M, and I think you were talking about that all throughout the year. So are there actually some kind of favorable working capital adjustments here kind of on top of the gross kind of sales proceeds that we're talking about?

Yeah, so to your first question, I expect about $10.4 billion net after tax and all of the customary closing adjustments from the Milan transaction. So if you look to the end of the year with all the puts and takes about we announced today on the capital allocation between the share repurchase authorization getting started with $3.25 billion and the fixed portion of the November 2023 is being paid down at $2.5 billion. that would put our year-end cash at roughly $4.8 billion. So a nice position to be in. As far as the working capital headwinds, so there's no working capital benefit to be had from a cash flow perspective. It was more just calling out the headwinds that were in our numbers prior to the separation of the M&M business. And so if you look at our cash use kind of prior to their separation, the largest portion of the working capital headwind was from the M&M business. So we were just highlighting our actual cash performance would have been better without them in the portfolio. So in the quarter, we were 73% as reported for free cash flow conversion. We would have been more in the range of the greater than 90% that we target for the RemainCo portfolio had we not had them in the results.

Great. Thank you. Thanks, Jeff.

Your next question comes from the line of John Roberts with Credit Suisse.

Thank you. I'll ask just one here. In semiconductor materials, Integris reduced the December quarter sales by about 10% for the new U.S. restrictions on China, and they also noted the memory chip weakness was affecting CMP disproportionately. Are you seeing anything different in the semiconductor market?

Yeah, well, on the export control issue in China, There's really three restrictions on that. By the way, I would put it in the category of it's more because of advanced chip technology. For instance, one of them is logic chips at 14 nanometers or below is restricted. It's one of the key ones. For us, it's not that big. Most of the fabs in China are not the high-end advanced chips. If you look at it on an annual basis, if we are restricted and cannot get a license to supply, that would be about $60 million of revenue for us on an annual basis, so say about $15 million on a quarterly basis, which we took that $15 million into account in our fourth quarter guide that we gave. Overall, on the semi side, we look at the inventory index, for instance, like Gardner puts out, and it point one right now if you kind of go back to the last downturn on semi back in 2019 um it peaked out at one point three one so just to give you a little bit of a parameter on where that sits so it's it's on the high end we think there's you know two or three quarters of correction there that we'll see um yeah but you know then the downturn in in 2019 was like six to seven percent was in the 19 timeframe.

Great. Very helpful. Thank you.

Your next question comes from Scott Davis with MyLIS Research.

Hey, good morning, everybody. Hey, good morning, Scott. Are you guys surprised that the 8% price didn't fully cover costs this quarter? Were there some kind of Inter-quarter cost increases or surprises there that caught you a little flat-footed?

No, Scott, it did. Maybe we misstated it. We did cover all the costs, our cost inflation. I think last quarter we reported we thought it was around $700 million. It's now $800 million for the year, and that's all based on mostly energy increase in Europe, as you're all aware of, on natural gas prices. And by the way, just to give you kind of more color to that, we are obviously seeing commodities start to come off their peak. We thought we would start to maybe start seeing some benefit, and hopefully we do in 2023, but then energy spiked. So the energy just about offset what we've been seeing the benefit on the commodity. So hopefully now as we progress over the next months, we start to see some spread there. that would be helpful. But no, we did implement more price increase. We covered the whole 800 that we're going to have for the year at this point in time. And just to remind you, every price increase we did, we put it into the product cost. We did not do it as surcharges that would fluctuate off an index. So customers would have to negotiate with us when there's any price changes.

Okay, that's super helpful, Ed. And just a little follow-up on interconnect. I mean, are you guys, I assume you're selling to Foxconn. Are you impacted by the plant shutdown that's been announced?

Yeah, so we did announce a deceleration in our expectations for the interconnect solutions in general, so it would be covered by what you're hearing in the headlines with respect to smartphone and consumer electronics and then, you know, ultimately the underlying PCB demand. So for the year, we now expect interconnect solutions to be down mid-single digits. So that would all be wrapped up in that number.

Yeah, just to give you a perspective, we thought in the second half of the year ICS would be up mid-single digits. Now it's down mid-single digits. I think we've taken all that into account. And by the way, just to remind you, it's hard to remember this, but we're already two quarters into the ICS, you know, that whole PCB, smartphone, laptop thing. downturn. So, you know, they don't last forever, but we've already had two quarters of it.

Okay.

That's good color.

Thank you. Appreciate it.

Your next question comes from the line of Steve Tusa with JP Morgan.

Good morning.

Good morning, Steve.

Given it's election day, I'll make a recommendation. You should run for office someday, Ed.

I like what I do now.

Yeah, I think you'll get the votes from the 10 guys who cover the stock for sure. So just on the fourth quarter price-cost, you were 130 bps, I think, headwind this quarter, I believe you said. I might have missed that. I assume that gets a little better in the fourth quarter, or the map suggests that it may not get better in the fourth quarter.

Yeah, so the dollar does get a little bit less in the fourth quarter because we start to lapse some of the prior year increases. And so we're expecting about a 5% price increase in the fourth quarter versus the 8% that we posted in third quarter and the 7% in the second quarter. As far as the margin headwind, it would be a little bit less, but our underlying guidance does suggest overall EBITDA margin improvement in the fourth quarter. So if you back into the fourth quarter from the full year guide that we gave We'd be more in the low 24% range from an EBITDA margin perspective versus last year at 23.2. And I'd highlight that that sequential decline, expected decline in EBITDA margin is really from, one, seasonality. So we tend to see some seasonality as our volumes are lowest in the fourth quarter. And also, we did elect to take down production to be able to better align our inventory level. So we are seeing some stabilization in the supply chain that gives us confidence we can start to to tweak down those inventory levels. And so there will be a unit cost headwind in the fourth quarter. So those two combined are the drivers of the sequential EBITDA margins decline.

And then just one more question on this. I know you gave the margin headwind, but just so we're all on the same page. What was the, out of the $800 million, how much of that came in 3Q?

About $240 million.

Of inflation?

Yeah, so we're at $650 a year to date. And then we expect another 150 in 4Q to get to the 800 for the full year.

Okay. And any carryover for next year when it comes to price? And you said now inflation, you probably won't get relief there, but any carryover on price in the next year?

Yeah, there should be some, especially in first quarter. So that's when we really started to ramp the price increases. And then we did see some inflation start to ramp in the first quarter. Okay. Our number hasn't materially changed. I believe back in 2Q, we thought the full year would be 500 million. So we did see some escalation in the 2Q timeframe, but the numbers have been starting to normalize in the back half of the year. So the increases that we just saw recently have been more on the European natural gas side versus the underlying raw material side.

Steve, it's going to be interesting for all of us going into 2023 as we work our way through it, how everyone handles this price-cost issue, because the commodities are definitely coming down pretty uniformly. Not crazy, but they're down 20%, 25% in many cases. So if the natural gas thing settles out, I think we've peaked on all this inflation. And then how do we handle price-cost as we move forward with all the price that we got?

Right, makes a ton of sense. Thanks for all the detail. Appreciate it.

Your next question comes from the line of Mike Lighthead with Barclays.

Great. Thanks. Good morning, guys. Good morning. Just one for me. Ed, I was hoping you could provide, to the degree you can, a bit more color about the decision to walk away from Rogers as opposed to pursuing another extension or rework transaction. It sounds like you're saying it was ultimately unworkable from a regulatory perspective. Is that fair, or was it just an issue of sitting in limbo for an elongated period of time here?

No, it's very simple. We did not get regulatory approval in China. It had been a full year. That was our outside date, and we ended it, which was the contractual agreement. So really, there's nothing more to it.

Okay, thank you. Yep, thanks, Mike.

Your next question comes from John McNulty with BMO Capital Markets.

Yeah, good morning. Thanks for taking my question. Ed, you spoke a little bit to the Internet Connect Solutions weakness. Can you speak a little bit broader in terms of the macro trends that you're starting to see right now? I know some of your business is pretty resilient through that, but are you starting to pull any levers just on macro concerns at this point that we should be thinking about?

Yeah, I'll let Lori start out. I'll add some color.

Yeah, I think as far as pulling levers to make sure that we drive the best margin profile that we can, we did announce in the queue that will come out this afternoon a restructuring program. Initially, it's really just to get after the stranded costs from the M&M transaction now that it has closed. So we signaled about $50 million of stranded costs associated with the M&M transaction, so we'll get at those first to take those out to be able to drive them up. further profitability. And then we've got room underneath the restructuring that we announced to take further cost action as appropriate if we start to see further deceleration in the top line.

And we have already, as a management team, laid out what those – so we'll do the stranded costs, as Lori said, but we've already laid out the detailed actions we do for some additional restructuring if we felt it was needed. And then I'll go back to the point I made a minute ago. There's a big lever in price cost.

2023. Got it. Got it. No, makes sense. Fair enough. And then just maybe just to follow up on the M&A questions from before. So I guess with Rogers clearly having some problems on the regulatory front, and maybe it's a political thing, U.S. and China or not, it seems like a lot of things are kind of getting held up at this point. Does it make it hard for DuPont going forward to make acquisitions in the electronics area? And should we be thinking going forward that bolt-ons would be more focused on the water and protection area, or is that really not the right read on this?

Let me say it this way. Just by the way it's played out, some of the things we're interested in happen to be in water and happen to be in the industrial technology space. So I guess if it stays there kind of targeted for down the road when we want to do something that we would have to deal with, and who knows on the electronics. I just don't know the answer to that. You know, we don't know what we don't know. But having said that, I mean, we loved Rogers coming in because it added some tools in the toolkit, but we have a very comprehensive portfolio in electronics. With the Laird in there, it's really been beneficial. Laird's been performing awesome, and they've gotten, as we highlight, I think, last earnings, they've gotten some wins for DuPont Technology, with some layered customers, and also I don't feel bad about where we're at at all on the electronics side. Again, it would have been nice to have Rogers, and we're not probably looking at an electronics deal anyway at this point in time, so not going to be an issue.

Got it. Thanks very much for the call, Alex. Yep.

Your next question comes from the line of Alexi DeFreemuth with KeyBank Capital Markets.

Thanks. Good morning, everyone. How do you think about the debt reduction versus potentially doing even larger buyback for this crunch of capital allocation?

Well, first of all, and we said this in our prepared comments, we'll do the $5 billion repurchase. And by the way, we can be in the market, in the open market, doing some of that if we economy is looking like so it's you know the ASR will take us you know eight nine months but we can be over the top uh doing some additional purchase so we'll just see how that plays out but okay and have the opportunity to do another ASR right on the heels if that's how we want to handle it so we have our options open to us there but we also have a fair amount of firepower as we kind of go through 2023 if you do the math and um you know again it would be for bolt on potential We'll contemplate that as we go through 2023.

Thanks, Ed. And going back to interconnect business, would you try to maybe forecast when this reaches a bottom? Do you think Q4 or Q1 could be when it stops going negative?

Yeah, and it does feel like we have reached the bottom in the interconnect space between the PCB application. So as Ed had mentioned, we're a good two quarters in, so it feels like we've bottomed out. We're not ready to call kind of growth in the next quarter or anything, but we do feel like the deceleration has plateaued.

Yeah, we've got to be pretty deep into it at this point in time. I mean, the PCB players in China really shut down, so I think they're correcting their inventory really quickly. I mean, they truly shut down. You know, it's not like they cut back on production. So I think they can fix things pretty quickly. And, you know, so I don't want to put a date on kind of building out of it. But, again, we are pretty far into it months-wise at this point in time.

Great. Thanks a lot.

Yep, thanks.

Your next question comes from the line of Mike Sisson with Wells Fargo.

Hey, good morning. Nice quarter. Just one question for me. You know, it seems like the consensus view is for a recession next year. Can you maybe talk about each of the businesses and how each should perform in a downturn? And that's when I think about the fourth quarter outlook, you know, multiplying that by four probably isn't the right way to think about a recession case and maybe, you know, walk through the puts and takes of that sort of potential.

Yeah, I mean, I think first starting on the financials, I think you're right to take the fourth quarter. It tends to be usually our seasonally weakest quarter. And so to take it and run rate it, you know, could be difficult. But I wanted to highlight, too, just the natural EPS growth that we have from the actions that we've taken on the capital allocation side, which will bolster us as we head into 2023. So, you know, between the share repurchase that we announced today at the $3.25 billion, the lower interest income that we caught out of a hundred lower interest expense that we called out of $100 million and then further interest income from the cash that we'll be holding in the balance sheet. We've got north of 15% EPS growth just from those actions alone. So a nice position to be in as we head into 2023. As Ed had mentioned, we'll aim to maintain favorability on the price-cost side as we start to continue to see the commodity prices decline. And I did highlight that we have initiated a cost restructuring program should we need it beyond the stranded cost that we've highlighted to take out. So from that perspective and from maintaining a good margin profile, I feel like we're protected as we head into next year. And from an end market perspective, you know, we've highlighted that we probably feel like we're already two quarters into the consumer electronics downturn. And the SEMI piece that had highlighted the inventory index that we pay attention to. And so while it is elevated versus where it was during the pandemic. It's not as elevated as it was back in the 2019 timeframe when we saw semi-volumes down in the mid-single-digit range. From the industrial side of the portfolio, so the remaining piece of electronics and then the broadness of W&P beside the shelter piece, those pieces feel pretty stable. So water, we've got a really nice backlog, at least six months of backlog in the water business. And nice performance on the defense side, especially on the arrow piece within the safety portfolio as we see those markets continue to recover. The one piece besides consumer electronics and semi that we're paying close attention to is obviously the shelter business, the North America residential side, which is about 40% of the business, we'll pay close attention to, obviously, with the news out there on the potential headwinds in that space. But we're not seeing anything material at this point, so...

Great, thank you.

Your next question comes from the line of Lawrence Alexander with Jefferies.

Everyone, this is Dan Rizzo on for Lawrence. Thank you for taking my question. You mentioned before about having prices not be surcharges but just kind of be in the production cost or in the cost of the product. I was wondering, historically speaking, have you ever, with that scenario, have you ever had to give price concessions or are they generally relatively sticky?

Well, I think for all of us, it's hard to totally answer that question because we never had inflation like this, at least in my career, and raised prices as much as all of us have. So our game plan clearly is to keep a spread there because I'm a strong believer we have big intellectual property. A lot of our products are needed. They're the best in the industry. and they should have good EBITDA margins with them. And generally, we do have very good EBITDA margins across the board. So the game will be to keep that spread there. But when you've had this kind of inflation, I don't think you hold on to all of it, and I don't think any company holds on to all of it by and large. But can you keep a spread will be the real game.

Thank you. That's helpful. And then just one other question. In terms of FX, You mentioned the headwinds. I was wondering if you've ever given a rule of thumb, like a five-cent move in the euro versus the dollar or something like that, or the basket translates into X percent in sales or EBITDA?

We've never given a rule of thumb that drop down from the top line headwind. So in the fourth quarter, we expect about a 6% year-over-year headwind from a currency perspective. The drop through down into EBITDA is not materially different than the overall EBITDA margin that we have for the total company. So you could use that to kind of model where we think the roughly $200 million year-over-year headwind in currency translates to EBITDA. All right.

Thank you very much. Thank you.

Your next question comes from the line of Christopher Parkinson with Mizuho Securities.

Great. Thank you so much for taking my question. Just given the solid result on W&P margins on your longer-term pathway back to 27-28, has the calculus changed at all between the buckets of price costs over the intermediate to long-term, improving ops, and just overall business mix? Is there any change of thought process or is just, hey, we have a lot of things going in the right direction and we'll get there and do course? Thank you.

Yeah, no, there's no change in even a margin improvement driver that you had mentioned. You know, the one piece that we'll continue to watch, as Ed had mentioned, was, you know, can we drive continued favorability within the margin improvement from price cost? So as the costs start to decelerate, are we able to maintain a more favorable price profile?

Got it. And just very quickly on ENI, You know, are you seeing any changes in deferrals and leading edge capacity ramps in any way, shape, or form, you know, in terms of, you know, core MSI heading into 2023? And in any way, does that change your expectation for 200 to 300 basis points of outperformance? Just any color in the, let's just say, preliminary framework would be very helpful. Thank you.

Yeah, I would say longer term there's no material change in the profile of high single-digit CapEx going in and driving high single-digit increases in production. You know, some of the numbers as we head into 2023 from a market research expectation do see a decline in MSI. So the initial numbers right now are around a 5% decline in MSI, but we would still expect that same outperformance of 200 to 300 basis points. And so if MSI is down 5% next year, we would expect to be down 200 to 300 basis points ahead of that.

Very helpful. Thank you so much. Thank you.

Your next question comes from the line of Josh Spector with UBS.

Yeah, hi. Thanks for taking my question. I wanted to follow up on the recession question earlier. So you said not annualizing or annualizing fourth quarter is not the right way to look at it. That's about $3 billion in EBITDA. talked a lot about a positive point that you could have on the price-cost side and some other restructuring items. I mean, is it fair to say that your starting bogey for next year from an EBITDA perspective is about flat year-over-year, even in a recessionary environment?

Yeah, I think it's a little too early to call what 2023 EBITDA looks like. So we highlighted the actions that we're taking to drive EPS improvement from the share repurchase and from, you know, overall performance improved performance in interest expense and interest income. But we haven't really indicated anything yet about what the EBITDA profile would look like. Beyond the actions that we're taking on the cost side to take out the stranded costs, and then we've got the ability to do more there should we see further need to.

A lot of it, by the way, comes down to how you all individually model a recession scenario next year, and therefore, how do you model commodity inflation or deflation coming? because that's going to have a big bearing on all the multi-industrial companies. You know, if you start seeing that benefit, and then back to a question earlier, can you hold some of that, I think is really going to be an interesting question for all the multi-industrials. So how that plays out is very different than any other recession we've been through.

Yep, understood. Fair point. And just wanted to follow up on WMP, and just specifically, I guess, the shelter side. Are you seeing any destocking? Is that baked into your fourth quarter guidance? I guess we've seen other firms talked about pretty severe destocking globally and even in North America into construction markets. So I'm just curious where you stand on that cycle or what the risk is of that increasing or accelerating into early next year.

Yeah, I wouldn't say there's anything material at this point. There are elevated inventory levels at some of the big boxes. retailers, but we haven't seen any material destocking yet at this point. So we did see positive volume growth in shelter in Q4. And I'll just remind you of the distribution of the shelter business and, you know, roughly a billion native sales. About 40% of it is commercial, which remains to be very strong for us. So that's, you know, selling into healthcare and education and other types of commercial applications. 40% residential and then 20% kind of the do-it-yourself markets.

And we did, just as a correction, we did see positive volume growth in shelter in Q3. We're assuming that moderates a little bit going forward, you know, as Laurie noted, given inventory in the channel. But it really hasn't changed materially in the order books to date.

Okay. Thank you. Thanks.

Your next question comes from the line of Arun Vishwanathan with RBC Capital Markets.

Great, thanks for taking my question. I guess I had two questions. So first off, when you think about the volume outlook, can you just describe maybe the volume outlook for water and some of the portfolio, parts of the portfolio that are less economically sensitive? Do you see kind of the lower peak to trough variability on earnings playing out as you expected with your earlier communication? Thanks.

Yeah, we do see continued strength in water. So in the third quarter volumes, we're up low double digits, and we see kind of mid-single digit growth in Q4. And as I had mentioned, we've got a really nice backlog there. So should there be any moderation in demand, we've got over six months of a backlog that we can work down to be able to bolster the overall volume profile for the water business.

And then just a question on capital allocation. You know, you obviously have some proceeds left over after the debt reduction and the share of purchase. Is there a timeline that you'd look to deploy that, say, to plus $1 billion? Is there any kind of thoughts you could offer for us how to think about that will be deployed? Thanks.

Well, so it's interesting. We're moving as fast as we can on the share we're purchasing. We only take out so much volume so quick. So we'll move as fast as we can there. And then, as we said earlier, just to punctuate again, we are in no rush to do have at this point in time that there's really nothing we're going to do with it presently and we'll just monitor the next few months on that and remember we still have to sell delrin so we don't have the money for that yet and that's probably more towards the back half of 2023 at this point in time thanks yep thank you your next question comes from the line of david begleiter with deutsche bank

Thank you. Ed, auto adhesives is doing quite well. What are the prospects for this business, and will it stay in corporate or are they going forward?

Well, Lori manages it, and it's growing like the wheat, so I'll let her answer it.

Yeah, so we are seeing really nice growth in the auto adhesives, primarily driven by the conversion and the opportunity that we have on the battery side. And so we saw the 25% organic growth in the third quarter, and we expect further growth as we move forward. The distribution between ICE and EV from a 2022 bills perspective is really pretty disparate. So the overall expectation for ICE vehicles is actually, I think, to be slightly down. and for EV-related materials is to be up, you know, well into the double digits. And so that dynamic is what is playing into our growth portfolio as we move forward. As far as finding a permanent home for the adhesive business, it will not stay in corporate. So, you know, here in short order, we'll figure out where those businesses need to be aligned. We wanted to make the decision after we had got through the Rogers decision. Now that we know that platform, we can figure out where these businesses – reside permanently going forward.

Yeah, we think we can leverage it well with some of our other auto exposure, especially on the EV side. So we'll organize ourselves to advantage ourselves as we talk to that customer base that we have other products and opportunities to sell into. So it'll advantage the adhesive business over time. But we're feeling very good about our win rate there. And you can see by the organic growth, Lori, what was the number? Yeah, 25% growth. coming over the next five years.

Very good. And do you have an update on PFAS and the South Carolina MDL?

Nothing really new to report, although we've been in pretty intense conversations. I'll just let you know I am personally involved in them with my general counsel. And, you know, want to put a timeline on it. I think this is public knowledge. The judge has continued to encourage settlement talks with the plaintiffs here. That's a good sign. Potentially, you have even using a mediator. We've made tremendous progress, but I don't want to put a timeline on it. It's a continuing process. You know very well we want to get the Water District case is settled. That's really the big focus for us.

Thank you very much.

Your next question comes from the line of Steve Byrne with Bank of America, Merrill Lynch.

Yes, thank you. Ed, you made a comment about some cross-selling between Laird and Legacy DuPont, and you also made the comment about

Steve, are you there? We lost Steve. Erica, we must have lost him. We can move on to the next.

Your next question comes from the line of Frank Mischke with Furnham Research.

Good morning, Frank.

Looking geographically, obviously very strong growth in North America for the quarter, but still high single digits in Asia and in Europe. And I'm curious if you could provide an outlook here in Q4. What are you seeing so far in those regions, as many others have talked about some of the difficulties that they've been seeing there?

Yes, so as you had noted, we had really strong performance in North America and Asia Pacific. As we look into the fourth quarter, our overall volume expectation and the guidance that we had provided was to be about flat. So that first is about the 3% that we saw in Q3 where the top of the house, North America, had mid-single-digit volume and Asia-Pacific had kind of low single-digit volume. So as we head into Q4, we don't see material change in Asia-Pacific volumes. Or Europe, we do see a little bit of a deceleration in the North America volume, so more in the low single-digit range, and so overall racking up to about flat year over year.

That's helpful.

On top of that, though, the price piece is what provides us with a nice organic number, and so we will continue to see, as I had mentioned earlier in the call, about 5% price increase.

Understood. And you indicated that you were going to lower operating rates in the fourth quarter. Obviously, interconnect stands out as an area. Where else may you be looking to lower your operating rates in the fourth quarter?

Yeah, it's generally across all the lines of business, just as we get more comfortable with the supply chain environment. So we feel like things have normalized there so that we can be a little bit more aggressive on the inventory front. And so it's across all the lines of business that we'll be reducing production rates.

Yeah, so look, we made a fundamental decision. We did it a couple years ago. We're losing some EBITDA at the expense of lowering working capital, and we decided to make that decision to get more in line going into 2023 with where we want to be from an inventory standpoint. Thank you so much. Thanks, Frank. Good to hear from you.

Your final question comes from the line of Steve Byrne with Bank of America, Merrill Lynch.

Yes, thank you. We'll give it another shot here. I just wanted to hear your view on your pipeline in R&D in each of your businesses. Putting end market outlook aside, where do you see the potential for the most growth from internal R&D discovery?

The biggest area always for us and its quicker cycle is In the electronics business, we have an 8% R&D spend there. It's very, very robust, and we're constantly introducing new products in that area, Steve. But one of the areas we're really focusing on, remember, one of the strengths at DuPont is the application engineering expertise. We live with our customers. We do design and work with them, and we're really focused on leveraging, for instance, the Laird platform with the existing DuPont technology. One of the things I was alluding to, we've got a couple auto customers where Laird was already in doing electromagnetic shielding, thermal management, and they have now been pulling in some DuPont applications and products for wiring protection and all that. So there's a lot of focus there on how can we get the synergies from a revenue standpoint from those two. So I'd say that's the biggest area. But remember, R&D for us is the heart of the company and applications. across the board here. We're very big on intellectual property. When we look to do a bolt-on, I think I mentioned this in my remarks, intellectual property loss is very key, and the ability to have strong application engineering across the board in all our end verticals is very key for us.

And maybe just one more to drill into your water business. Do you monitor your customers' water treatment systems to ensure seek ways to lower their energy costs or to upgrade into newer technologies?

We do, yes. We've got a really nice portfolio that we're growing in the lithium battery space that we've mentioned for the water business. So there's about 30% of water is in the specialty, so kind of outside the industrial application. And that's where all of those high growth opportunities sit. Also, Obviously, we're well aligned with the UN sustainability goals, and that fits front and center with the water business as well.

And to your point, by the way, one of the big things we work on with our technology is right to the heart of the question you asked, is reducing the energy consumption. So we're working on technologies around that, and that could be cutting edge for us to give us competitive advantage.

Thank you. Thank you.

And at this time, I'll turn the call over to Chris McCrae for closing remarks.

Yeah, just thank you, everyone, for joining our call. And for your reference, a copy of the transcript will be posted on our website. This concludes the call. Have a great day.

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